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bigduckontax
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3817
Experience:  FCCA FCMA CGMA ACIS
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My parents are both 80 years old and are willing to part

Customer Question

Hi ThereMy parents are both 80 years old and are willing to part half of there buy to let to property to myself and my brother to minimise on IHT for us, the buy to let property value is £1,000,000 and was bought in 1987 for £78,000 plus work and expenses on the property equate to £22,000 so the total combined with expenses and the property is £100,000.I understand the capital gains on the property based on half being given to myself and my brother including both my mum and dads capital gains allowance of £11,000 each (total £22000) and half of the £100,000 for the property and expenses (£50,000) would be around £119840.Here is the problem, if my parents pay the £119840 and gift us half the property but pass away in 2 years this money is then lost and myself and my brother would still have to pay IHT of %40 on the buy to let..Is there a way if myself and my brother front the money of £119840 for the capital gains so if they do pass away early that money is from our estate and we can use it on ensure that the CGT paid by me and my brother would be a charge against the estate for IHT purposes – i.e. the value of the estate is reduced by the amount of the cgt paid.If you have a more efficient way please suggest it.Thank YouJose
Submitted: 10 months ago.
Category: Tax
Expert:  bigduckontax replied 10 months ago.

Hello Jose, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.

You have the position correct save that the non cumulative Annual Exempt Amount (AEA) is actually 11.1K and you have omitted to include Lettings Relief (LR) which is available up to 40K.

If the property is gifted to you a Potentially Exempt Transfer (PET) is created in their Inheritance Tax (IHT) affairs. PETs run off at a taper over seven years and in the event of a decease within this period are added back to the donor's estate for IHT purpose. PETs are the first to suffer IHT and if the estate is insufficient to meet the IHT on the PET the liability cascades down to the beneficiary for immediate settlement.

The classic defence against a PET is a reducing term life insurance, but your parents' ages may make premium levels prohibitive.

I am so sorry to have to rain on your parade.

Customer: replied 10 months ago.
Posted by JustAnswer at customer's request) Hello. I would like to request the following Expert Service(s) from you: Live Phone Call. Let me know if you need more information, or send me the service offer(s) so we can proceed.
Expert:  bigduckontax replied 10 months ago.

Love to talk but I am answering you from a location 6 hours ahead of BST so the cost would be prohibitive.

Customer: replied 10 months ago.
Are you from the uk?
Expert:  bigduckontax replied 10 months ago.

Normally, yes, just away at present.

Customer: replied 10 months ago.
My family has two homes the buy to let is which to I am referring to, is there a way that if the £119000 is paid by myself and my brother does not go to waist or we can claim it back and use it to pay off the IHT?
Customer: replied 10 months ago.
if indeed the worse case scenario happens and my parents pass away 1 year later
Expert:  bigduckontax replied 10 months ago.

The transfer to you is a disposal for Capital Gains Tax purposes and your parents must pay that tax. IHT is an entirely separate tax on death. Both will have to be paid.

Customer: replied 10 months ago.
could they pass on the 22000 CGT allowance every year and is the 7 year in effect if this is done for every year it is done?
Expert:  bigduckontax replied 10 months ago.

No, the AEA is non cumulative, it is a use it or loose it allowance. The exposure to tax could be reduced slightly by making the transfers in different tax years. It night be far more economic not to make the transfer at all.

Customer: replied 10 months ago.
AEA?
Expert:  bigduckontax replied 10 months ago.

Annual Exempt Amount, the 11.1K.

Customer: replied 10 months ago.
Can my parents use the £22000 per year allowance on giving me and my brother a percentage of the the property worth £22000 which is currently roughly 2%
Expert:  bigduckontax replied 10 months ago.

Yes, but the AEA is actually 11.1K.

Customer: replied 10 months ago.
per person so it would be 22,200 total?
Expert:  bigduckontax replied 10 months ago.

Yes

Customer: replied 10 months ago.
Why do you see it as not economical, £22,200 allowance on a 1 million pound house is better than nothing each year, please suggest an idea I could look into?
Customer: replied 10 months ago.
anything to slash the price down before the Inland revenue get there 40% on a potential 1.2 million pound house that is of course prices continue to increase
Expert:  bigduckontax replied 10 months ago.

Whichever way you turn there will be exposure to tax. Always bear in mind Benjamin Franklin's dictum that in life there are but two certainties, death and taxes.

Customer: replied 10 months ago.
Ok I just want to get something clear as the AEA allowance of £22,200 for this year, could this be used to pass on a percentage of the property, I know that we will have to use a chartered surveyor and solicitors every year but the cost would be less than a £1000.My dads accountant was talking about this with him the other day, if not what is the point of a yearly allowance if you cant use it?
Expert:  bigduckontax replied 10 months ago.

I could not say, I am not the Chancellor of the Exchequer.

Customer: replied 10 months ago.
I am sorry to rabbit on but I get to many different answers here is one from a chartered accountant based from the potential gift off the rental home."Thinking more about your problem – as I see it, the solicitor dealing with the transfer should be able to ensure that the CGT paid by you and Carlos would be a charge against the estate for IHT purposes – i.e. the value of the estate is reduced by the amount of the cgt paid. It has to be a legal charge in order for it to be effective for IHT because the HMRC could/would challenge etc .j"
Expert:  bigduckontax replied 10 months ago.

Remember that the transfer of a house to children on death is rising from 2017 to 2020 to one million from the current IHT 325K limit.

Customer: replied 10 months ago.
The first house is sorted its the rental house thats the issue 40% of a million
Expert:  bigduckontax replied 10 months ago.

There really isnt a way around that save your parents living long enough to avoid the seven year rule.

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